Interest Free Loan could not be treated as a Financial Debt without evidence that the amount was disbursed for time Value of Money: NCLAT [Read Order]

The National Company Law Appellate Tribunal (NCLAT) has ruled that Interest free loan could not be treated as a Financial Debt without evidence that the amount was disbursed for time value of money.

 The Appellant – M/s. Orator Marketing Pvt. Ltd. claimed that there was the default in payment of the debt of Rs.1,56,89,740on on the part of the Corporate Debtor. M/s Samtex Desinz Pvt. Ltd. which was incorporated in 2018. To meet the business expenses, Respondent had raised a loan of Rs.14 Crores from M/s. Tata Capital Financial Services Ltd. That loan was a secured loan and the Respondent had mortgaged land, building, etc. in favour. Still, the Respondent required more funds for day to day working and development of business. The respondent approached the open market and financial lenders but could not get additional debt. It is stated that in such circumstances, to ensure the continued development of the business of Corporate Debtor, Mr Sameer Bhardwaj, then Director, through sister concern – M/s. Sameer Sales Pvt. Ltd. advanced Rs.1.60 Crores to the Respondent. Later, when the debt was due, notice was served to make the demand for the outstanding debt. The Respondent replied on 18th February 2020 referring to market conditions and labour problem and sought time to make the payment in instalments. Subsequently, the application filed under Section 7 of Insolvency and Bankruptcy Code, 2016 (IBC) and the Adjudicating Authority after hearing Counsel for both sides, rejected the Application under Section 7 holding that there was a mere grant of loan and it was not financial debt. It was observed that the loan was interest-free and also that there was no evidence that the amount was disbursed for the time value of money. The Adjudicating Authority thus concluded that the Appellant could not be treated as a Financial Creditor.

Judicial Member Justice A.I.S Cheema and Technical Member V.P. Singh while dismissing the appeal held, “It has been then argued that the Appellant after the execution of the Assignment Agreement in its favor, not being related party and having taken the assignment for consideration, the loan extended would have to be treated as a Financial Debt. We are unable to accept such an argument. The basic nature of the loan as witnessed from the Loan Agreement (Annexure A-2) will not change. If it was a simple debt extended to the sister concern, merely because the original lender has now assigned the debt to the Appellant will not change the nature of the transaction. . . . . we do not find any error in the findings recorded by the Adjudicating Authority where the Adjudicating Authority found that the transaction is not a transaction of financial debt and thus declined to admit the Application under Section 7 of IBC. There is no substance in the Appeal. The Appeal is dismissed.”

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